For a few years now a cold war has been raging between independent financial advisers and insurance companies over group and personal pensions business. It all started with the advent of auto-enrolment (AE). With ordinary businesses thrashing around wildly, trying to work out how to automatically enrol new staff into a low-cost pension scheme, providers were busy building AE-friendly group personal pensions and master trusts designed to offer an alternative to the state-sponsored Nest.
Up until that point, advisers and providers had lived alongside each other in relative harmony. The advisers focused on keeping a close working relationship with business clients, supporting them to set up, review and manage their staff pension schemes and associated services. But while Nest was keen to maintain this friendly arrangement with advisers, it was also targeting employers directly with the promise that setting up a Nest arrangement was simple enough to do yourself. Faced with a state-backed competitor going direct to market, the insurers started to do the same and began writing directly to underlying clients encouraging them to alter or set up new AE pension plans without the need to maintain their advisers.
Given that advisers were no longer able to charge trail fees or fees based ostensibly on contributions made by members, suddenly the prospect of going direct rather than fronting up advisory fees looked palatable. And so war began.
At first, mainstream advisers were unaffected. The largest companies initially tackling AE were working with the larger employee benefit consultants designing sophisticated and large scale solutions. But as medium-sized and smaller companies began to go onstream as part of the Pension Regulator’s staggered staging process, IFAs started waking up to the fact that their clients were being poached by the very firms they had recommended in the first place.
Three years on
Now, more than three years into the AE process, the cold war is in danger of bubbling up into a rather warmer one. Only the smallest firms, and new firms set up after 1 April 2012, are still due to stage.
The fallout of the war so far is clear to see. In a bid to resist the advances of the insurance companies, advisers had no choice but to build their own products. Negotiations and truces had little long-term impact. The only way advisers could protect revenue streams from corporate clients was to offer them bespoke or locally managed pension schemes, and so bypass the enemy altogether. What would be the point of recommending a provider to a client, only for that provider to take over the relationship once the initial set-up was complete, leaving the adviser without any ongoing or future role?
The outcome has been an arms race for building an arsenal of new pension products. And the structure that was settled on was the master trust. The beauty of a master trust is that almost anyone can make one, and by creating their own arrangements – albeit with service providers doing much of the day-to-day work – the IFA becomes the linchpin of the whole arrangement and keeps in control.
That is not to say it is easy, but it is achievable without needing the scale and resources that a large insurer enjoys. You need a trustee, a pensions administrator and an investment platform. With plenty of willing third-parties happy to provide outsourced services, master trusts have sprung up around the country. At last count at least 70 master trusts had been identified, although only a handful had achieved the Pension Quality Mark standard run by the Pensions & Lifetime Savings Association (the organisation formally known as the NAPF) and fewer still were listed by the Pensions Regulator as having been ‘independently reviewed’.